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(March 19): Taiwans central bank acknowledged in the clearest terms to date that it is intervening in foreign exchange markets, using the word that it had studiously avoided and vehemently protested until now. Regular late-session moves by state-backed banks to pare gains by Taiwans currency against the dollar are a kind of intervention, Governor Yang Chin-long told reporters after Thursdays decision to maintain record-low interest rates. He used the English word intervention in his otherwise all-Mandarin response to a reporters question. Previously Yang had referred to such actions as smoothing.

Daily efforts to stabilize the Taiwan dollar began in earnest in June of last year, holding at around the 29.5 level against the U.S. dollar until September. Since then, it appears that the bank has been managing the currencys appreciation, with intraday trading crossing the 28 line during most sessions this year, before retreating at close. Trading has been more erratic in the past two weeks - the currency weakened to 28.47 to the U.S. dollar at 11:56 a.m. Taipei time on Friday after closing at 28.31 on Thursday.

His remarks come after the U.S. Treasury decided in December to add Taiwan to its currency manipulator watch list. Yang suggested a week ago that the U.S. might designate Taiwan a currency manipulator, but that there wouldnt be much negative impact for the local economy, given robust U.S. demand for semiconductors. Semiconductors, he said, were the main factor driving Taiwans trade surplus with the U.S. If they want to reduce our trade surplus with them, then we could just stop selling them our chips, he joked to lawmakers on March 11. But they need them!

Based on the information provided in the article, explain the plausible reason behind the appreciation of the Taiwan dollar and why would the Taiwan central bank intervene? Using the demand and supply of currency approach and the information from the article only, explain the two ways that the Taiwan central bank used to influence the exchange rate of its currency. [15 marks]

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